Question

Raven Corporation owns three machines that it uses in its business. It no longer needs two of these machines and is considering distributing them to its two shareholders as a property dividend. All three machines have a fair market value of $20,000 each. Their basis is as follows: Machine A, $27,000; Machine B, $20,000; and Machine C, $12,000. The corporation has asked you for advice.

A. If Raven distributes Machine A, the result will be a_______loss of $_______.
B. If Raven distributes Machine B, the result will be_______of $______.
C. If Raven distributes Machine C, the result will be a______of $______.
D. Therefore, to________on Machine A, Raven should consider______Machine A. Raven should consider distributing Machine B because there will be______on the distribution. To______on Machine C, Raven should consider_______Machine C.

Answer 1

A.If Raven distributes Machine A, the result will be a NONDEDUCTIBLE LOSS of $7,000

B. If Raven distributes Machine B, the result will be NO GAIN OR LOSS OF $0

C. If Raven distributes Machine C, the result will be a TAXABLE GAIN of $8,000

D.Therefore to PRESERVE THE LOSS on Machine A, Raven should consider SELLING Machine A. Raven should consider distributing Machine B because there will be NO RECOGNIZED GAIN OR LOSS on the distribution. To AVOID RECOGNIZING THE GAIN on Machine C, Raven should consider NEITHER SELLING NOR DISTRIBUTING Machine C

Step-by-step explanation:

A. If Raven distributes Machine A, the result will be a NONDEDUCTIBLE LOSS of $7,000

Calculation as

(20,000 – 27,000) =-$7,000

B. If Raven distributes Machine B, the result will be NO GAIN OR LOSS OF $0

Calculated as :

(20,000-20,000)=$0

C. If Raven distributes Machine C, the result will be a TAXABLE GAIN of $8,000

Calculated as:

(20,000-12,000)=$8,000

D.Therefore to PRESERVE THE LOSS on Machine A, Raven should consider SELLING Machine A. Raven should consider distributing Machine B because there will be NO RECOGNIZED GAIN OR LOSS on the distribution. To AVOID RECOGNIZING THE GAIN on Machine C, Raven should consider NEITHER SELLING NOR DISTRIBUTING Machine C